Gentex - Earnings Call - Q1 2019
April 24, 2019
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to Gentex Reports First Quarter twenty nineteen Financial Results. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr.
Josh Oberski, Director of Investor Relations. Sir, you may proceed.
Speaker 1
Thank you. Good morning, and welcome to the Gentex Corporation first quarter twenty nineteen earnings release conference call. I'm Josh Oberski, Gentex Director of Investor Relations, and I'm joined by Steve Downing, our President and CEO Kevin Nash, our Vice President of Finance and CFO and Neil Boehm, Vice President of Engineering and CTO. This call is live on the Internet by way of an icon on the Gentex website at www.gentex.com. All contents of this conference call are the property of Gentex Corporation and may not be copied, published, reproduced, rebroadcast, retransmitted, transcribed or otherwise redistributed.
Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex Corporation with respect to any unauthorized use of the contents of this conference call. This conference call contains forward looking information within the meaning of the Gentex Safe Harbor statement included in the Gentex Reports first quarter twenty nineteen financial results press release from earlier this morning and as always shown on the Gentex website. Your participation in this conference call implies consent to these terms. Now I'll turn the call over to Steve Downing, who will give the first quarter of twenty nineteen financial summary. Steve?
Speaker 2
Thank you, Josh. For the first quarter of twenty nineteen, the company reported net sales of $468,600,000 which was an increase of 1% compared to net sales of $465,400,000 in the first quarter of twenty eighteen. This growth was in contrast to global light vehicle production that declined approximately 7% in the first quarter of twenty nineteen when compared to the first quarter of twenty eighteen. Additionally, the actual global light vehicle production levels worsened in excess of 3% for the first quarter of twenty nineteen when compared to IHS Markit's mid January forecast for the first quarter of twenty nineteen. The first quarter of twenty nineteen started off in a very similar fashion to the second half of twenty eighteen, with vehicle production forecast being optimistic about growth, but with actual results coming in well short of those forecasts.
A production environment like this obviously makes forecasting difficult and continues to be a reason for our conservative outlook for the remainder of the year. Despite these vehicle production volume headwinds and certain company specific product headwinds, our revenue outperformed our underlying markets by approximately 8%. Our growth was driven by very solid performance of the full display mirror, which helped us overcome the significant volume reductions in our primary industry. For the first quarter of twenty nineteen, the gross margin was 36.2%, which was down when compared to a gross margin of 37.1% in the first quarter of twenty eighteen. The gross margin during the quarter was negatively impacted by approximately 90 basis points due to tariffs that became effective in the second half of calendar year twenty eighteen.
Our ability to maintain our gross margin profile on a quarter over quarter basis, if not for the 90 basis point impact from tariffs, required a tremendous effort from the team to overcome the headwinds created from our annual customer price reductions and the inefficiencies from the slower growth rate. The resiliency in the gross margin was supported by improved product mix during the first quarter of twenty nineteen, driven by growth in full display mirror and a 9% growth rate in exterior auto dimming mirrors. Operating expenses during the first quarter of twenty nineteen were up 9% to $48,000,000 compared to operating expenses of $44,100,000 in the first quarter of twenty eighteen. Operating expenses are in line with our stated expectations for 2019 as we continue to focus on increasing our growth rate through additional launches of full display mirror, integrated toll module and additional auto dimming mirror applications. Our operating expenses are also focused on new product innovation that will allow us to expand our product portfolio in the areas of connected car, digital vision and large area dimmable devices.
We remain confident in the long term growth opportunities of these product areas based on the high level of OEM engagement we received at CES in January and that has continued since that time. Income from operations for the first quarter of twenty nineteen decreased 5% to $121,600,000 versus $128,500,000 last year. The decrease was primarily due to increased operating expenses and lower gross margin dollars. Other income increased to $3,300,000 in the first quarter of twenty nineteen compared to $3,200,000 in the first quarter of twenty eighteen, primarily due to decreased interest expense. During the first quarter of twenty nineteen, the company's effective tax rate was 16.5%, up from 15.6% during the first quarter of twenty eighteen, primarily driven by a decrease in tax benefits related to stock based compensation.
Net income for the first quarter of twenty nineteen decreased 6% to $104,300,000 compared with net income of $111,200,000 in the first quarter of twenty eighteen, driven by increased operating expenses and an increased tax rate on a quarter over quarter basis. Earnings per diluted share in the first quarter of twenty nineteen remained at $0.40 in line with earnings per diluted share of $0.40 in the first quarter of twenty eighteen as a result of a 7% reduction in diluted shares outstanding from share repurchases. During the first quarter of twenty nineteen, the company repurchased approximately 4,700,000.0 shares of its common stock at an average price of $20.37 per share for a total of $96,300,000 of share repurchases. As of March 3139, the company has approximately 29,100,000 shares remaining available for repurchase pursuant to the previously announced share repurchase plan. The company intends to continue to repurchase additional shares of its common stock in the future in support of the previously disclosed capital allocation strategy, but share repurchases may vary from time to time and will continue to take into account macroeconomic issues, market trends and other factors that the company deems appropriate.
I will now hand the call over to Kevin for the first quarter financial details.
Speaker 1
Thank you, Steve. Auto dimming mirror unit shipments increased 1% in the first quarter of twenty nineteen when compared with the first quarter of twenty eighteen, which was driven by a 2% decline in interior auto dimming mirror unit shipments, primarily as a result of the 7% decline in global light vehicle production. Conversely, the company experienced a 9% overall increase in exterior auto dimming mirror unit shipments, which was highlighted by a 50% increase in North American exterior auto dimming mirror unit shipments. Automotive sales in the first quarter of twenty nineteen were $455,800,000 compared with $455,000,000 for the first quarter of twenty eighteen. Full display mirror and exterior auto dimming mirror revenue growth was essentially offset by reductions in interior auto dimming mirror revenue, annual customer price reductions and product specific revenue headwinds.
Other net sales in the first quarter of twenty nineteen were $12,800,000 an increase of 22% compared to $10,400,000 in the first quarter of twenty eighteen on increased dimmable aircraft window shipments and increased shipments of certain fire protection products. Now for a balance sheet update. The following balance sheet items represent a comparison versus December thirty one of twenty eighteen, which are also included in today's press release. Cash and cash equivalents were $221,700,000 compared to $217,000,000 as of December 31. The increase was primarily due to cash flow from operations, which was mostly offset by share repurchases, dividend payments and capital expenditures.
Short term investments were $180,300,000 up from $169,400,000 and long term investments were $126,500,000 compared to $138,000,000 Fluctuations in the two were driven by changes in fixed income investment maturities within the portfolio. Accounts receivable increased $30,700,000 to $229,000,000 primarily due to the higher sales level compared to the fourth quarter of twenty eighteen as well as timing of sales within each of the quarters. Inventories as of March 31 remained consistent at 225,300,000.0 Prepaid expenses were $14,900,000 which was a decrease from $25,600,000 The decline was primarily due to reduction in refundable income taxes. Accounts payable decreased to $2,700,000 to $87,500,000 and other current liabilities increased $16,600,000 to $94,400,000 primarily as a result of increases in accrued income taxes and accrued wages. Now for some cash flow highlights.
Cash flow from operations for the first quarter of twenty nineteen was $133,800,000 compared with $147,400,000 during the first quarter of twenty eighteen. The change was primarily due to the lower net income and changes in working capital. And capital expenditures for the first quarter were $16,800,000 compared with $26,200,000 in the first quarter of twenty eighteen. And depreciation and amortization for the first quarter was $28,100,000 compared with $28,000,000 in the first quarter of
Speaker 3
twenty eighteen. I'll now hand the call over to Neil for a product update. Thank you, Kevin. In the first quarter of twenty nineteen, there were 11 new nameplate launches of our interior and exterior auto dimming mirrors and electronic features, net of previously disclosed feature headwinds. The first quarter of twenty nineteen launch rate represents a 10% increase over the first quarter of twenty eighteen.
During the quarter, over 70% of the net nameplate launches contained advanced features led by launches in HomeLink and Full Display Mirror. Now for an update on our Full Display Mirror product. During the first quarter, we began shipping FDM on the Toyota HiAce, Land Rover Evoque and the Jaguar XE vehicles. The launches for Jaguar Land Rover represent a milestone for the FDM product because they are the first launches with a European based OEM and include product shipments that will be used for global applications on these vehicles. We believe that the Jaguar Land Rover launches will help push FDM forward with other European based OEMs in the future.
The launches in the first quarter brought the number of nameplates that we are shipping on to a total of 27. Here is a comprehensive list of the OEMs and the number of nameplates where we are currently shipping FDM. General Motors, our initial launch customer, has 14 different nameplate shipping. Subaru is currently shipping on three nameplates. At Nissan, we are shipping on two nameplates.
For Toyota, we are now shipping on six nameplates. And at Jaguar Land Rover, which was our fifth OEM, we are currently shipping on two nameplates. As we look forward to the balance of the calendar year, we expect to launch serial production on at least eight additional nameplates through the end of the year, which will put us ahead of our previously stated goal to ship at least 500,000 units of full display mirrors in 2019. From a new business development standpoint, we are pleased to announce that we have secured our ninth OEM customer for Full Display Mirror business during Q1 twenty nineteen, and we are optimistic that we'll secure our tenth OEM customer in either the second or third quarter of twenty nineteen. In summary, we are pleased to be able to show progress in the launch and award of additional Full Display Mirror systems despite the difficult vehicle production environment that we are facing.
Our latest products and innovations continue to show great potential for growth and revenue as evidenced by the launch cadence and new OEM awards. I will now hand the call back over to Steve for guidance and closing remarks.
Speaker 2
Thank you, Neil. Based on the mid April twenty nineteen IHS Markit light vehicle production forecast for our primary regions of North America, Europe, Japan, Korea and China, our current forecasted product mix and expense growth estimates, the company continues to maintain its previously announced annual guidance ranges in each of the following areas: revenue of 1,830,000,000.00 to 1,930,000,000.00 gross margins in the range of 36% to 37% for the year operating expenses between $195,000,000 and $200,000,000 estimated tax rate between 1618% capital expenditures between 90,000,000 and $100,000,000 and depreciation and amortization between $105,000,000 to $115,000,000 Additionally, the company is maintaining its previously announced revenue guidance for calendar year 2020 to be between 38% above 2019 revenue estimates. The first quarter of twenty nineteen was a challenging vehicle production environment, but the company continued to deliver growth that beat our underlying markets by approximately 8%. The organization is working hard to launch products that include features like full display mirror, integrated toll module and other electronic features that are contributing to help us offset the headwinds caused by losses from our older technologies and the negative vehicle production environment. We are confident in our ability to deliver long term growth that is driven by our unique technology platforms as we continue to invest through R and D and SG and A to execute the product launches that Neil detailed in his presentation.
These important launches are providing growth for this year and 2020, while we fund the new technology platforms that will drive growth for the company longer term. Our focus on operational discipline, combined with our capital allocation strategy, is designed to work hand in hand to produce growth and shareholder return, both today and over the next several years. Thank you for your time today and we can now proceed to questions.
Speaker 0
Thank And our first question comes from Chris Van Horn from B. Riley FBR. Your line is open.
Speaker 4
Good morning, guys. Thanks for taking my question and congrats on the quarter.
Speaker 5
Thanks, Yosh. Thanks, Chris.
Speaker 4
So, I think you mentioned in the past that given IHS's expectations have been a little bit off from what the reality is, You were kind of baking in a little bit more of a conservative view. Are you still taking that stance?
Speaker 2
Yes. The rest of the remaining forecast for the year includes what we came into the year with in terms of adjusting a little bit more off of what IHS is predicting and we make some manual adjustments to those just given the last eighteen months of vehicle production volumes. We believe that there's a little bit more downside bias than there is upside.
Speaker 4
Okay, got it. And then are we still seeing the effects of the WLTP in Europe? I know that's a big region for you all. Just curious of what you're seeing from production level over there?
Speaker 2
Yes. It's purely speculation at this point. There's not a lot of concrete data available in the marketplace to say exactly what's causing some of the headwinds in Europe. We do believe there are a little bit of remnant issues from WLTP that are affecting especially the first half of twenty nineteen from a European production standpoint. The current forecast from IHS suggests that, that improves in the back half of the year.
That's really one of the reasons why we're a little more pessimistic on the IHS predictions is that we're not sure that the macroeconomic environment is really going to improve that much in Europe in the back half of twenty nineteen.
Speaker 4
Got it. Makes sense. And then on the I believe you said 70% from advanced features on the launches. Could you get a little bit more color there? That's typically higher than you've reported in the past.
Was it just kind of anomaly this quarter? Or are you seeing just higher take rates for some of those advanced features?
Speaker 3
I think it has to do with timing on the launches of some of the products, with HomeLink and Full Display Mirror being the primary ones. And as we talked about the numbers for the quarter, full display mirror, we had a really good quarter for that product. So I'm not I wouldn't say it's an anomaly, but it was a good quarter from a feature set and output to the market. And I don't think it's going to be a constant run rate at that level either. I wouldn't expect that.
Well, I think
Speaker 2
when you look at the production, if you look at the global production issues, the China market being affected the most in this last quarter, that's where a lot of our base mirror launches have been taking place in the last eighteen months to two years. So when you see that market slow down, you get fewer base mirror launches there, but you end up picking up advanced features in the other markets. So it makes that percentage increase a little more than what it has been.
Speaker 4
Okay. Makes sense. Last one for me, and I'll jump back in the queue. Could you just update us on some of the new technologies you've been highlighting over the past couple of years, the CMS biometrics, the Bluetooth, which you have an award with, and maybe even the dimmable glass, excuse me, just some update there.
Speaker 2
So Neil and I are looking at each other who was going to go first. I can't stop. I'm trying to grab the mic, I guess. We'll start with dimmable glass. The first concrete award was the one we announced at CES was in aerospace and with the new Boeing program.
And so we're really excited and focused right now on getting that program to launch. Obviously, there's a tremendous amount of work whenever you're launching a program in aerospace. So we have a solid twelve to eighteen months ahead of us of hard work to make sure we launch flawlessly with Boeing. But that was the kind of the first remnants of that program or success in that area was with that. Since that time, what we've been working on with OEMs is we had a lot of requests from OEs for large area devices, prototypes, whether those are incorporated in a vehicle or just something that they can get their hands on and test and understand better the capability of that product.
So what Neil's team has been working really hard on since CES is making sure that we're capable of delivering some proof of concepts and prototypes for the OEMs to do that evaluation. Quite honestly, walking out of CES, one of the things that's pushing the organization really hard is trying to keep up with that OEM demand for prototypes and proof of concepts. So we continue to work hard there. There's a lot There's a lot of technical areas and barriers that we have to overcome to get that product into automotive, but we're definitely confident that the demand is there for that type of a solution.
So we continue to invest. When you look at our full display mirror and then the offshoots of that being camera monitoring system, we continue to be very encouraged by the progress we're making with full display mirror. And we believe that once you have that full display mirror technology in place, solutions, whether they're mirrorless or whether or not they're add ons to a mirrored solution, are really just the next logical step in that product portfolio. And so Neil's team continues to build the relationships we need from the supplier standpoint and in house make sure we have that product offering in place. So we continue to see interest in all those areas for the product offering.
The HomeLink side in terms of Connected Car and really probably the most interesting that's just starting to grow is really the integrated toll module solution. So having that go market now with Audi in the North American market and have additional two additional OEMs that have sourced those programs, obviously, there's a lot of work, but to get those programs ready for the marketplace. But we're excited about the initial feedback of that product from the OEMs that have seen it and experienced it.
Speaker 4
Okay. Thanks again for the time guys.
Speaker 1
Thank you.
Speaker 0
Thank you. Our next question comes from Richard Carlson from BMO Capital Markets. Your line is open.
Speaker 6
Hey, good morning guys.
Speaker 7
Good morning.
Speaker 3
Good morning, Richard.
Speaker 6
So I just want to start on the margin. You had usually 1Q is your softest quarter for margins with the annual price downs, and you're within the guide now, so 36.2% versus the 36% to 37%. So what are some of the risks you see this year that could actually show that being down and to get us to the 36% versus what seems now should be kind of weighted towards the high end of that range?
Speaker 1
Thanks, Richard. I think the biggest risk that we pose every quarter is the product mix piece. It happened to be that interior mirrors were down, primarily base mirrors as a result of China being weak. And so and then FDM and exterior mirrors were very strong. So that helped kind of offset the customer price reductions.
Our purchasing performance was a little bit better than we thought kind of going into the year. So that also helps. And so we I think the biggest risk is really a product mix doesn't unfold the same as it did in Q1. But right now, we're not seeing major shifts, at least in our forecast from, kind of what Q1 performance was.
Speaker 2
I'd say the biggest risk factor would be what happens with tariffs. So I mean that could be it's a risk factor and if they were to get worse from where they are today, but it also offers some upside potential throughout the year if a trade deal is put in place. We continue to run at that end of twenty eighteen run rate for tariffs on an annualized basis. So there is opportunity to improve from here if a trade deal is secured.
Speaker 6
Got it. And then what's actually now built into your guidance for tariffs? Because it should have come down just a little bit with the List three step up not happening, right?
Speaker 1
Yes. So the run rate is in that 12,000,000 to $15,000,000 annualized, based on that. If you remember, what we guided was to was 15,000,000 to $20,000,000 total year tariff dollars. And so it's more in that kind of 12% to 15% range.
Speaker 6
Got it. And then with that North American exterior mirror number, I mean, percent super strong. You've highlighted in the past having a takeover win. Was that all lit because the sequential growth is also impressive. So is there anything else in there helping that?
Speaker 2
Well, been some increases in take rates and some additional programs that we've launched and you combine that with the takeover business from our competitor and you produce that 50% kind of growth rate in the quarter. So that's the third quarter, I believe, now of kind of outpacing growth rates. So we'd expect at least one more quarter of kind of high level growth rates and then the year over year comps will become a little more difficult. But it's a great book of business and it definitely, to Kevin's point, has helped stabilize the margin profile.
Speaker 6
Got it. And then just last one for me. For the FTM, what was the actual shipments this year? And what is your is your guide still 500,000?
Speaker 3
The actual shipments for 2018 were 380,000 units. And based on what's going on in the market right now, we're expecting in the launches that I talked about, we expect to exceed the 500,000, but that again is based on take rates, based on the customers that we expect that are launching, we'll launch at the take rate they say they're going to launch, that the market holds together. So there's a lot of variables there. So we're still staying with our over 500,000 units is the target.
Speaker 6
Got it. Thank you guys very much. Appreciate that.
Speaker 5
Yes. Thanks, Richard. Thank you.
Speaker 0
Thank you. And our next question comes from John Murphy from Bank of America. Your line is open.
Speaker 7
Good morning, Just a follow-up question on the full display mirrors. When you go in and go through the bid process on those, do you are you finding that you're getting good exterior take rates with them? Or is this something that kind of leads as a single mirror and then ultimately over time develops into a three mirror system?
Speaker 2
No. Ironically, almost all the awards we have are already three mirror system customers. And so it's really about kind of that next step in evolution of a vision system for them. In other words, they have auto dimming capability available on most of their vehicles, and they want that enhanced functionality and really a product that the consumer resonates with. So most of those customers are already three mirror system customers or at least have auto dimming.
Some of those customers only offer driver side auto dimming currently. But when they do make that step up to a full display mirror, it's usually about the consumer sentiment piece.
Speaker 7
Okay. And then a second question on full displays. I mean, you think about sort of fixed cost coverage given the higher price, but I'm just kind of trying to understand sort of the manufacturing here. I mean, we got to be thinking about much higher margins, but I'm just curious as you think about sort of variable versus fixed on the full display versus your traditional interior and exterior dimming mirrors. I mean, what's kind of the thought process there?
Speaker 1
It definitely has higher contribution margin. At a same for same basis, we're typically replacing a base mirror, which is a lower price point and a lower gross margin. And so we're getting a lot better coverage as it relates to that. It is a more complex manufacturing process, obviously, but so far, margins overall margins on that product, are in the corporate average range. So it's definitely contributing to the year over year improvements in contribution margins.
Speaker 7
Okay. So if we think about the gross margin 37.1% ex the tariffs in the quarter versus 37.1% last year, I mean, it seems like the margins maybe should have gone up because of mix. Is there something else going on with the margins we should be thinking about or maybe I'm missing?
Speaker 1
Yes. Had some specific legacy products headwinds that we've been talking about quite a bit, the SmartBeam driver assist kind of negative headwinds that are those are the SmartBeam piece is historically at a higher gross margin. And then just the fixed cost coverage with our overall net growth rate at 1%, we do make our capital investments in automation and equipment. You're not getting any leverage at that 1% sales growth rate.
Speaker 2
And on a year over year basis, especially in Q1, you have your basically 85% of your annual customer price reductions start on January 1. So on a year over year basis, you've got those customer price reductions. Historically, we haven't seen full purchasing benefit until midway through second quarter before we get the full benefit of the price downs from our suppliers. So normally Q1 is a little more tight than the rest of the year. And so when you look at treading water basically being unchanged, when you can take out ex tariffs, we really feel pretty solid about that and we did get the contribution from that step up in product mix.
Unfortunately, there was the downturn in the global production environment that took away some of our interior mirror volume that made that overhead coverage even tougher to accomplish.
Speaker 7
Got it. And then just lastly on CapEx. I think I heard you right. The number in the quarter I think was $16,800,000 if I got it had it right. It sounds like that's a little bit below the sort of the annualized run rate you're looking for.
Is there just some timing issues here and then we'll see catch up in CapEx going forward?
Speaker 1
Yes. We continue to monitor kind of where the market is, and we take a little bit closer approach on individual projects and approvals. And yes, we're running a little bit lighter than the annualized figure. And if the market turns and we have growth outgrowth there, then we'll continue to keep an eye on it.
Speaker 2
But yes. And part of that year is timing. Part of it is just the timing of the projects of when they're happening, and the first quarter was a little lighter. You'd expect a little bit of an increase throughout the remainder of the year. But like Kevin said, we're definitely we have brought down that total CapEx pretty significantly in the last eighteen months, still funding all the projects we need.
But we are a little tougher on the criteria for what a payback period looks like and what the financial ramifications are of CapEx.
Speaker 7
I'm sorry, and how quickly can you kind of turn that on and off? Because I mean, run rate, you'd be a little bit below $70,000,000 which is quite a bit below what you're talking about for full year. So I mean how fast do you turn this on and off? I mean it seems like something would take a little bit more lead time, but it sounds like you have more flexibility.
Speaker 2
Well, of it's just about timing of invoices too on capital projects that have been kicked off. So that's why we say you will see some fluctuation from quarter to quarter. We know we have some projects that are kicking off in Q2 and Q3 that will raise that run rate versus what we had in Q1 already. Those have already been agreed and signed off on. It's just about when that equipment gets installed, when it gets delivered to us, installed and ready for production.
Speaker 7
And not saying this happened. So if there was a slight delay in one of some of those programs, the CapEx would take longer to be put in play to be spent, right? I mean, it's that simple. Correct. I think that's what's going to but that's you have that flexibility.
Speaker 8
Correct.
Speaker 7
Great. Thank you very much guys.
Speaker 1
Thank you. Thanks, John.
Speaker 0
Thank you. Our next question comes from James Picariello from KeyBanc Capital Markets. Your line is open.
Speaker 8
Hey, good morning guys.
Speaker 9
Good morning.
Speaker 8
On FDM, can you confirm what the growth rate was in the quarter? I think that might have been mentioned, but just to make sure. And then regionally, can you talk about these new customers that you're bringing on here? Got the ninth customer announced this be announced this quarter and then you got a tenth customer that you'd expect to close on in the second or third quarter. Is that opportunity in Europe
Just to maybe get a sense for that. Thanks.
Speaker 1
So, we're going to stick with annual guidance as it relates to FDM shipments currently. But reiterating kind of what Neil said, we feel given all the launches and the activity and the take rates of what we've been seeing so far that we're going to be in excess of the $05,000,000 for the year.
Speaker 2
In terms of naming the OEs, we've been very careful about this because of the because how much the OEMs that have launched with our full display mirror product have used it as part of their marketing of their vehicles. We've been exceptionally careful about mentioning them. So we won't say their names until either they announce it or until they show the product available on their website or on a vehicle or show it at a trade show or a car automotive environment. So we've been steering away from that. What we will say is we've had a mixture of high volume in those awards from five until what we're projecting to be 10 by the end of the third quarter of this year.
We've had a wide mix of different OEMs who have been involved, luxury based OEMs, high low volume luxury OEMs to higher volume OEMs. So what's exciting is that we believe the product isn't limited to a niche. It's not limited to just certain high end vehicles. It is a pretty broad based appeal of a product. And probably what's more relevant for us and more exciting even is that it doesn't have the geographical bias that a lot of our products have had, I.
E, a HomeLink or a Compass product that has traditionally been a North American product. This product truly is a global product. A lot of the OEMs that we've launched with, those OEMs have chosen to launch in what would be foreign markets for Us or export markets, not in the North American market. So it's been exciting to watch this product rollout and get a lot of attention at international auto shows.
Speaker 8
Got it. And FDM growth in the quarter, is that something you could share?
Speaker 2
No, we're going stick to our annual guidance for now.
Speaker 8
Okay. And then how should we think about the cadence of the driver assist and smart beam headwind for the year? You previously called out a 200 basis point headwind for the full year. Just curious how that played out in the quarter, what the expectations are related to the headwind for rest of the year?
Speaker 1
Given the downturn in production on a year over year basis, it's that the piece of it is about 200 basis points from true program loss, probably another 50 to 100 basis points because of the volume losses in the overall market. So call it two fifty to 300 basis points all in there.
Speaker 2
Well, that's what honestly, in terms of our total financial performance, that's probably the part that's most exciting about a 1% growth quarter is that we really had 300 basis points of headwinds from product losses plus a production end market that was down 700 basis points versus prior year. So to put up a growth rate inside of that really strength speaks to the strength of our full display mirror and our outside mirror launches.
Speaker 8
Yes. And just last one for me. China, just what are you seeing in China at this point? Are you baking in stabilization in the back half or more of a V shape recovery, which is kind of the baked in assumption for IHS, high single digit growth in the back half. I know you do make adjustments based on assumed take rates.
Just curious what you're factoring in there.
Speaker 1
Yes. Once you get beyond kind of the twelve week window, we're using IHS with a little bit of conservatism, like Steve mentioned already. Our assumptions are the same as what we went into the year with, but not necessarily as optimistic kind of with that 1% to 2% kind of overall reduction in all markets, not just China. But we continue to monitor it. And I think our assumptions played out fairly well in Q1, and we feel like there's still not major drivers of growth in those end markets.
Yes. So if you
Speaker 2
look at China specifically, really this kind of pullback in automotive production started at the end of twenty eighteen, call it early Q3 or mid Q3 through Q4. And right now, IHS is showing a recovery kind of halfway through Q3 and then quite a bit of recovery in Q4. We would probably be a little more pessimistic about that recovery than what IHS is showing specific to the China market. So yes, we kind of look at each of these regions. Like Kevin mentioned, we do have the advantage of having twelve weeks of release data, for certain areas and certain customers.
And so we can use that to help kind of extrapolate where do we think the IHS data is accurate and where do we think slightly overstated for the recovery in China.
Speaker 8
And in that release data, are you seeing some stabilization on a prospective basis here in China?
Speaker 2
Yes. What we would see is really more consistent with Q3, Q4 and Q1 going forward into Q2. So we wouldn't we were not expecting a huge improvement in Q2 in the China market.
Speaker 8
Got it. Thanks guys.
Speaker 5
Thank you.
Speaker 0
Thank you. And our next question comes from David Kelley from Jefferies. Your line is open.
Speaker 9
Good morning guys. Thanks for taking my questions. Another one on full display mirrors for me. I guess how should we think about the addressable market over the next two to three years based on your win rates and the European opportunity you referenced? We're just trying to get a better feel for potential FDMM shipment growth opportunity maybe over the medium term.
Speaker 2
Sure. Well, I think the exciting part is, despite the revenue that the product produces, we're only talking about the original guide was only for 5,000,000 units this year. So we view the available space. If you look at the number of OEMs who are producing high end vehicles, large trucks, SUVs, vehicles that this product fits really well with, just from a pure visibility standpoint, not even talking about the consumer sentiment piece, we believe there's at least several million vehicles in the world that this is a perfect fit for. And so we continue to chase and pursue down that path, down the path of a very large available market.
And we don't think that we're being overly aggressive in that kind of perspective of what the addressable market is.
Speaker 9
Okay, great. That's helpful. And then just to switch gears and looking at the operating expense ramp about in line with your expectations. I guess, you speak to the cadence maybe for the balance of the year? Should we expect any quarter to quarter lumpiness in either R and D or engineering expense associated with some of
Speaker 1
the new products or launches upcoming?
Speaker 2
No, I wouldn't expect a whole lot of bumpiness. I think it will be pretty consistent with that kind of ramp up rate Really, if you look at the beginning of twenty eighteen, the changes throughout 2018 and then into Q1 of twenty nineteen, we'd expect that trajectory to continue, if not slightly stabilize. So I don't think you'll see a huge amount of lumpiness. The team is well in place now, and we're working through those launches. Anything that does happen that we need outside help with, we tend to contract just to help take the edges off.
So we don't have to hire 100% of our needs. We can contract some of that, but those tend to be fairly small percentage changes to the overall R and D spend.
Speaker 9
Okay. Thank you. And then last one for me and I'll pass it along. I know aircraft windows are a smaller business for you. Given one of your customers has been in the news recently, do you see any change in revenue cadence in aerospace?
Speaker 2
No. In fact, the probably the good news, if there is any good news when dealing with the issues with our customer is that it's not the planes that we're on nor that we're sourced on. So, so far, it hasn't had any impact in our shipping volume. Our customer continues to launch this product to get ready for the July execution, and we continue to work hard to make sure we're meeting their timing and expectations for that launch. All right, great.
Thank you. Thank you.
Speaker 0
Thank you. And our next question comes from David Leiker from Baird. Your line is open.
Speaker 10
Hi, this is Joe Berwink for David. Good morning. On the dynamic where your initial FDM customers started out three mirror customers and they've gone to FDM, can you quantify what that's meant generally speaking in dollar terms? So is this $100 typical content on a vehicle going to two to 2.5 times that with FDM with these customers?
Speaker 2
Well, like for our launch customer, Kevin's point was spot on there, which is we were replacing if you take outside mirrors out of it because they continue to buy outside mirrors. In other words, if OEM is launching a full display mirror and they're already purchasing outside mirrors, they don't get rid of outside mirrors to add FDM. So that content is unchanged. On the inside, however, with our launch customer, they were typically about a $20 to $25 average sell price for the mirror that they were buying before FDM, and that bumped up to the $180 to $210 $215 range depending on which product they were buying. You're So talking about an additional $160 to $180 in content with that FDM decision.
Speaker 10
And does the fact that some of your initial launch partners are mass market automakers, the fact that they have 200 to $300 of mirror content on vehicles, has that caused non FDM customers that are using Gentex to reconsider their own mirror strategy to see other high profile examples with a lot more content ultimately dedicated to mirrors?
Speaker 2
Yes. I mean, I think it changes their perspective from a technology perspective. The product gets a lot of it has gotten a lot of attention at least from consumers and from technology write ups about automotive, the industry in general and vehicles that are launching with this type of tech. I think the other thing that's helped us is like typical for Gentex is we try to work hard with our customers to provide a business case for them. So we're not talking about $200 in content that they can't get reimbursed for.
Really, what we're pitching to them is not just the product and the technology, but also the business case that if we're doing this right and we understand the consumer correctly, that they can buy from us for $160 and hopefully resell this for 1.5 to 2x that price. And so it's not only a new and hopefully exciting technology, but it's also a positive business case for them.
Speaker 10
Is there going to be a situation still on FDM where you're producing simultaneously the different generations of product? And does that create any it's a complex product to make to start with, but does that create any additional complexities where the incremental margins for a period of time might be a bit less?
Speaker 2
Yes. So we're actually shipping our Gen one and Gen two systems right now. So typical for Gentex as we innovate and create new iterations of this product, I fully expect that we'll be into a Gen 2.5 in the next eighteen months to two years. And so we'll have all three generations at that point shipping at the same time. That's part of the requirement of what we do is we know we need to support the customer and the launches that they've gone through.
And so we design our manufacturing system around making sure that we can handle all that complexity. Now that being said, to your point, as you launch a new product or you change from a Gen one to a Gen two, there are obviously startup issues and sometimes yield issues that impact profitability. That's so far because of the way we've managed that, that has not had a significant impact to our overall corporate financials. We've been able to manage that transition very well. As we're learning through this product, we've also been able to develop Gen two to be a more manufacturable product than Gen one.
So, so far that launch has gone very well on Gen two and hasn't had the negative headwinds to margins that we normally see when we launch a new generation of a product.
Speaker 10
Okay, that's great. And then my last question, and I apologize if you gave this, but can you maybe call out how far below you're assuming production is in the Q3 and Q4? And specifically, were some questions about Europe, but IHS, I think, assumes Europe grows 5% in Q3. But obviously, there is a new emissions requirement happening in Q3 as well. So maybe just expectations.
I think you said no growth or limited growth in Europe, but maybe just explicitly what you're assuming for end markets?
Speaker 1
Yes. If you look at
Speaker 2
the full year, we took we didn't kind of quantify it by the entire global production, but we looked at certain specific markets, especially China and Europe, and we were probably a couple of percentage points worse than IHS when we put together that full year forecast.
Speaker 10
Okay, great. Thank you very much.
Speaker 1
Thank you.
Speaker 0
Thank you. Our next question comes from Anthony Deem from Longbow. Your line is open.
Speaker 11
Hi, good morning.
Speaker 3
Good morning. Good morning, Anthony.
Speaker 11
Few questions from me. First, is there any update from the WTO on EU's list of duties imported from The U. S? And with rearview mirrors included on that list previously, I'm wondering how conversations might be going with customers ahead of 2021? And maybe if you see a need to build capacity in Europe or if you're confident can negotiate pass throughs?
Speaker 1
Great question. There hasn't been any changes to the list as, it did die down obviously last fall when Trump said he had things worked out with Europe, but that continues to be an open point. We keep our eyes on the situation and ears with customers. And as you're well aware, Anthony, we have done manufacturing both in Europe and in China historically. And so the conversations are pretty fluid and there's not been a big push for localization currently, but it's something that we continue to evaluate with or without tariffs, what our global footprint looks like.
Right now, we continue to feel like doing it here in The U. S. Is the best course. But if customer demand drives that, we'll certainly consider those options. But right now, there hasn't been a big push to the European tariff changes.
Speaker 11
Got you. And then as you think about it from a capital allocation standpoint, clearly a lot of focus on share buyback at Gentex, which is great. Maybe if you guys don't see greater clarity or a trade deal sometime soon, mean, what could this have implications towards the level of share buyback?
Speaker 2
Well, I think everything when it comes to overall financial performance, everything has the opportunity to affect the level of share repurchases. One of the things we look at is the valuation of the company, what our growth prospects are over the next two to five years. And as long as we feel comfortable that our growth prospects are going to outperform the marketplace and the stock valuation hasn't moved along with that, then we're going to aggressively pursue that course of action. At the same time, M and A front is this is not saying that we won't pursue M and A activity. Obviously, our criteria for what a good financial deal looks like is probably a little harsher than most.
But at the same time, what we love is the hurdle rate for what we compare against as ourselves. And so when we look at the valuation of Gentex and we look at the multiples of EBITDA we're trading at, we still think it's a fair value for the stock. So we continue to look at all those factors continuously, and those are always subject to change based off availability of targets and assets. And then obviously, if financial performance were to decline or something were to happen, our capital allocation strategy would adjust accordingly.
Speaker 11
Got you. And then I think, Kevin, you mentioned you started off the year pretty strong with purchase reductions. Price downs versus purchase reductions, last year, if I recall, I think it was 70 basis point gross margin headwind. I'm wondering what's factored in the guidance for 2019, if any, because you're starting out the year pretty well, it seems.
Speaker 1
Yes. There still is a little bit of a gap, but the gap has closed. Our teams continue to work on finding sourcing arrangements. And with the market softening a little bit, overall global automotive market softening, it has eased a little bit of the constraint, but there still is a bit of a gap currently between kind of the APR and the purchase cost reductions. It's just that, it wasn't as, I guess, it was slightly better than what we were expecting.
And because of the work of our purchasing commodity teams, sourcing different suppliers in some cases.
Speaker 2
And some precious metals relief and so there's been a few factors that with kind of a global slowdown or at least the beginning of what appears to be a global slowdown that's taken some of the pressure off the commodities.
Speaker 11
Got you. And then if I could fit one more in, ER and D line, can you help us get a sense for sort of the budget percentage allocated towards maybe newer next gen product development versus launch costs, if you're able to share that? And I'm also wondering at the rate of cost inflation, the high single digit territory, is that consistent across both launch activity and innovation, new and next gen product development?
Speaker 2
We instead of giving you a breakout of what part goes to there, we'll kind of talk about the strategy and then what's changed in the last two years, so well, really the last three years. Neil's team continues to grow as we have ideas and capabilities that we want to bring up in the organization. Probably the one that's changed the most is two years ago, we started out on this course and we launched a whole new series of products from a pure R standpoint that has now moved into more of the D side of the launch phase. And that is ideas like our HomeLink Connect product, our integrated toll module, full display mirror itself, and generating that Gen two concepts and his team working on Gen 2.5, Gen three concepts. Beyond that, we've added a whole new set of things that we're working on and that we've shown at CES the last couple of years.
So a large area of dimmable devices and the technology leap that we're having to make to try to get those ready for a market like automotive. And so what you see is the team flexes from one idea to the next, and they move with those products. Some of them end up staying with the product and helping it move from R to the development phase and to launch phase. Others then get reassigned and move into other categories. Those kind of ebb and flow constantly, and these people are highly talented individuals who are capable of moving and becoming more research focused or more development focused depending on what phase of execution we're in.
So that's really kind of a continuous changing percentage, and that's why we try not to limit it by, this is what percentage is focused on R and what percentage is focused by on the development or launch. And so we continue to kind of move and flex people depending on the ideas that are coming in and where we are in the launch phase.
Speaker 11
Great. Thanks for taking my questions.
Speaker 1
Thank you. Thanks, Anthony.
Speaker 0
Thank you. Our next question comes from David Whiston from Morningstar. Your line is open.
Speaker 12
Thanks. Good morning.
Speaker 3
Good morning.
Speaker 12
Wanted to ask about the whole ongoing discussion of cameras replacing mirrors and are there any updates to the story arc there in terms of ROA? I'm still telling you they want the dual redundancy of cameras and mirrors. Anything else that's really changed in the past year that you wanted to highlight to the market?
Speaker 3
This is Neil. I think the I'll start and Steve can jump in. I think the more the market's gone, if you go back two or three years ago, there was a lot of noise about cameras replacing mirrors on every car within the next two weeks. And the reality is, is the complications of doing that type of system, getting the performance to a level that can compete or actually do well compared to a mirror as well as getting the consumers to accept that type of product is a lot more complicated and is taking a lot longer than what was initially anticipated. I'd say after the first couple of vehicles that have come out in the market now that show it on luxury vehicles on low volume, there's still questions that are being asked in the market, but I would say a lot of customers have walked away from that being a primary focus of putting engineering and resources into trying to develop that and put their resources more into their electrification and autonomous side, versus trying to replace a standard product that they know every consumer can use to put it to a digital only product that some will not use?
Speaker 2
So we continue to see opportunities in that space for Gentex to participate. And so, we continue to refine that the skill set. We've actually been active in bidding a couple of different OEMs in the last eighteen months, a couple of which have decided despite the fact they started a quote phase, decided to push back or delay, if not cancel, that execution. Like Neil mentioned, because of the concerns and the things we've always talked about are concern factors. We viewed it and our business case has been around build around the fact that we could expand upon our FDM lineup and offer additional electronic technology and hopefully build a business case for the OEM.
And I think that's a big part that the OEMs have realized that without a business case, this is an incredibly difficult, expensive technology that the consumer isn't if the consumer is not pulling it, then it's going to be cost that you're carrying with very little upside benefit. So we continue to try to work on our product offering to be able to meet all those questions, including the business case.
Speaker 12
Okay, thanks. And just to follow-up on the earlier buyback question, is it fair to say as long as you guys still have plenty of cash on hand, you'd be pretty aggressive even in a recession?
Speaker 2
Correct. Yes. If you look at the cash, equivalents and the short and long term investments, those are all fixed income. They can all be turned into cash very quickly. And so we continue to be very well positioned in our cash position.
We also have access to line of credit. And obviously, we stay focused on trying to make sure we're generating cash off of our existing business appropriately. We believe with all those factors that we're well positioned to move if the market price were to retrench to where it just didn't make sense anymore. Or at the same time, that flexibility gives us opportunities for companies outside of our own if M and A targets become available at favorable pricing.
Speaker 12
Okay. Thanks.
Speaker 1
Thank you. Thanks, David.
Speaker 0
Thank you. Our next question comes from Ryan Brinkman from JPMorgan. Your line is open.
Speaker 13
Hi. Thanks for taking my questions. As you gain more and more traction with the full display mirror, have you started to see on the horizon any competitor products to try to cut into this area of yours? Do you see competition for FDM as being simply a system of cameras and displays? Or are there others attempting to replicate your approach of offering an auto dimming mirror that can additionally serve as a system of cameras and displays?
Speaker 2
No, there's been quite a few people that have shown competitive type products. We believe our track record, our reliability, the unique physics problem that needs to be solved by having a reflective surface, but yet a display shining through that is not a simple one to overcome. And we've spent a tremendous amount of time on it. This didn't happen in the last two years. We've been working on these trans reflective coatings for the better part of fifteen years.
And so we took every bit of that amount of time to get it to the state it's at today. And so we believe there's from a technology standpoint, we have some advantages. We believe from a scale standpoint and from a cost competitive standpoint, we actually have some advantages. So to stand here today and say that I thought three years ago that we'd have 10 OEMs that we think we'll have secured by second or third quarter, I didn't think it would move this quickly. I certainly thought that we would have had lost a couple of programs.
And our market share, if it were $70.80 percent, would still be very competitive. In our primary markets, we'd say that our market share is actually better than that and we feel good about where we're at from a competitive standpoint. It doesn't mean we're without a competitor. That's not what that means. It just means we feel like our product offering is unique enough that it position us well to make a total business case to the OEM that makes sense.
Speaker 13
That's helpful. Thanks. And then just lastly, what is the latest that you're seeing with regards to whether vehicles capable of being driven in fully autonomous mode will have mirrors? So at the Tesla Autonomous Investor Day on Monday, they mentioned increasingly leaving components off of vehicles such as pedals and steering wheels, etcetera. Is this likely in your view?
Or do you think that robotaxis and other autonomous vehicles might for a long time still have the ability to be driven by humans, at least when necessary, with more positive implications for mirror shipments?
Speaker 2
Well, I think that's our position is that the market will bifurcate once there is fully autonomous vehicles available. The concept of a robotaxi being without that type of functionality probably makes sense. The concept that a high end luxury OEM is going to produce a car without those features doesn't necessarily make as much sense to us. And the reason why is that you as an individual, you may want to drive your car sometimes. Maybe not all the time.
Maybe there's moments where you want it to be fully autonomous. But that ability to choose as a consumer is really what drives a lot of the marketplace on the consumer electronics side all the way up and through automotive. And so we think that there's a use case for fully autonomous where you can't control that vehicle at all for a robotaxi type environment, but we believe there'll be different OEMs that take a very different approach as it relates to wanting that functionality available so that you as a consumer, if you want to put it in fully autonomous mode, can. But it'll be a completely different environment if you want to drive that vehicle sometimes. And there's still people that enjoy having that control, that still enjoy the experience of driving.
And quite honestly, if you're talking about high end performance cars or even the high end luxury vehicles that allow you to have some control, we think there's a redundancy there that's important. There's also the ability for the consumer to choose that mode that's going to become very marketable for OEMs going forward.
Speaker 0
Thank you. And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Josh Obersky for any closing remarks.
Speaker 1
Perfect. Thank you everyone for your time this morning. As a reminder, we will be hosting our Annual Shareholder Meeting on May sixteen of twenty nineteen and our Analyst and Investor Day this year will be on August twenty one of twenty nineteen. If you'd like more information on attending either of these events, please feel free to contact me after this call. We look forward to seeing many of you there.
Thanks and have a
Speaker 2
great rest of your week.
Speaker 0
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.